A wasteful Minnesota tax break on military pensions

As frustrated seekers of state tax relief know only too well, a bill that would have provided tax savings for several categories of deserving Minnesotans was found to contain a drafting error and felled by Gov. Mark Dayton's veto earlier this month. It sits in limbo as legislative leaders discuss a possible special session; those talks are set to continue Tuesday.

But one group of persistent pleaders for special tax treatment is already sitting pretty. An exemption from state income taxation for all military pension income — regardless of a tax filer's age or other income — made it into law in the omnibus spending bill Dayton signed June 1. Some 18,000 Minnesota recipients of military retirement pay, some with total incomes well into six figures, will receive a tax break estimated to average $2,500 per filer a year. The exemption will deprive state coffers of $23 million in fiscal 2017 and increasing amounts in subsequent years.

One can appreciate the sacrifices and service of military veterans and still question the advisability of this tax break — and one would be in good company. The bipartisan conference committee that assembled the vetoed tax bill opted not to include it in that carefully crafted measure. The committee, which included the Legislature's most knowledgeable stewards of state tax policy, designed a bill that provided targeted tax relief for Minnesotans carrying disproportionate financial burdens — student loan debtors, small-business property owners, low-income working families, low- and middle-income families coping with high child care costs. Military retirees, many of them still in their prime earning years, did not make the conference committee's cut. (Regrettably, neither did disabled or low-income veterans, though a bill to increase a tax credit available to that larger cohort of veterans was also in the legislative hopper.)

But a procedurally irregular back door opened during the frenetic final days of the 2016 regular session, and advocates for military pensioners rushed through it. A "sweetener" was sought to attract the votes of spending-averse House Republicans for the year's omnibus budget bill, priced at $187 million in fiscal 2017. In negotiations out of the public's eye, the military pension exemption was chosen to play that role.

It evidently served that purpose well; the House vote on the 599-page spending bill was 95-39. Then again, some House members might not have known it was there. Tax measures usually don't appear in spending bills, for good reasons that include the state Constitution's requirement that laws "embrace only one subject." Further, this massive bill did not arrive on the House floor until 7:30 p.m. on the session's final day for enacting bills.

This tax break's ability to serve its stated public-policy purpose is more questionable. One of the bill's legislative champions, House veterans affairs chair Rep. Bob Dettmer, R-Forest Lake, contends that by joining 16 other states that fully spare military pension income from state income taxation, Minnesota will persuade more veterans to make their post-military homes in this state.

That theory has been only weakly borne out by an experiment of sorts in Minnesota and Wisconsin in the past 15 years, as described to legislators in a May 4 memo by the nonpartisan House Research staff. Wisconsin exempted military pension income from its state income tax in 2001, when military retirees made up 0.28 percent of the population in both states. By 2014, military retirees were up to 0.34 percent of the population in Wisconsin — and 0.32 percent in Minnesota. That's a difference of only about 1,000 tax filers after 15 years of quite disparate tax policies.

Is that small difference — which cannot be attributed with certainty to state tax policy alone — worth the loss of $23 million a year from the state general fund, which pays for so many of the building blocks of state prosperity? The tax conference committee didn't think so. We don't either — and we wish legislators would not break with customary lawmaking procedures in order to bestow tax favors.